easyJet expands services at Manchester Airport – the future is orange

Analysis

As easyJet continues its evolution towards becoming more of a business airline, it has announced additional routes at Manchester Airport (MAN), UK, for 2013.

A seemingly innocuous statement (it will add routes at other airports also, of course) belies the impact that easyJet – and Ryanair – are having at an airport that once treated LCCs as if they were an unwelcome virus from another planet, as it sought to become the UK's northern international hub.

But things have changed. Manchester is now bracketed with the UK’s other ‘regional’ airports rather than as a national intercontinental gateway (though it does remain one) and increasingly behaves like a regional airport. Meanwhile, what was the ‘preferred’ carrier there for many years (British Airways) has virtually exited Britain’s third busiest airport altogether.

As easyJet grows in strength at MAN the future, to paraphrase a well known British television commercial, seems to be orange, with a little yellow and blue thrown in for good measure.

easyJet will expand its Manchester network in summer 2013 with the basing of a seventh aircraft, an A319, and the launch of five new routes from Feb-2013 onwards, bringing the total to 29. The new routes will include Reykjavik, Venice, Antalya, Mykonos and Santorini. All but Mykonos are already served, and in some cases by multiple carriers. easyJet's entry is clearly designed to add competition to markets where it sees an opening, rather than the more risky establishment of new routes.

Icelandair in particular must be concerned. Not that long ago the monopoly carrier between Iceland and the UK (because the bilaterally designated UK airline did not want to operate the route), Icelandair is now under attack from a variety of LCCs and network airlines from airports all over the UK on routes that are gaining passengers, but not as quickly as seat capacity.

...and will launch unserved Moscow

Subsequently easyJet also revealed that it plans to launch Manchester-Moscow four times weekly service in spring 2013 after the UK CAA awarded it rights to operate between the two cities. Although it is not the “first ever scheduled service between the two cities” as easyJet appeared to claim in a press release, it is the first for 17 years. Aeroflot operated the route between 1985 and 1996 with TU-154s and a year ago applied to the Russian government for permission – which was granted – to start up the route again with a daily service.

Aeroflot has not restarted the route to date and is now at a distinct disadvantage as a result, once easyJet begins. It is rare that a network carrier usurps an LCC that is already established on a route.

Along with the Moscow route, served by an eighth Manchester-based aircraft, others will be added by easyJet too, such as Prague, which is currently served by Jet2.com after CSA exited the UK altogether (London as well as Manchester) two years ago, and Thessaloniki, Greece’s second city, which is currently served only by charter airlines. With these services the route network will expand to 32.

At this stage it may be interesting to look at the ‘timeline’ of easyJet’s arrival, and growth, at Manchester.

2008 is a key date, because it was then that Manchester Airport Group (MAG), under terrific pressure from neighbouring Liverpool Airport (Peel Airports), which had courted first easyJet then Ryanair with attractive deals, finally decided to throw in the towel with British Airways and open up its charging system in a way that was attractive to a variety of airline business models, including LCCs.

Previously scheduled budget airlines were pincered between BA and other legacy carriers at one end of the scale and what was once a vast array of charter airline routes at the other. It is hardly surprising that they sought out alternative cheaper airports such as Liverpool, Doncaster-Sheffield (also Peel Airports), Blackpool and even the MAG-owned East Midlands Airport as an alternative.

But the Manchester tariff revision, which saw an overall reduction of 38% in landing charges and less expensive off-peak rates appropriate to the periods that LCCs often fly, attracted more services from existing no-frills airlines such as Jet2.com and bmibaby. Subsequently, easyJet and Ryanair came in (Ryanair was already ensconced with its Dublin service, but that was just about all), sometimes to the detriment of the other LCCs. easyJet has been a permanent fixture ever since, growing steadily as the table above indicates, while Ryanair’s progress has been more of a staccato presence; it grew its routes then exited in a dispute over charges (what else?) then came back again. Currently Ryanair is selling 34 routes from Manchester.

easyJet’s commercial manager Ali Gayward, commenting on the carrier’s plans for further growth at Manchester in the coming years said, "Manchester for us represents a huge opportunity. It is the second largest aviation market in the UK, after London, and if you think where easyJet sits, we are always the largest or at least the number two airline at any airport where we operate. However, we are not there yet at Manchester and that is why we want to grow our presence there as quickly as possible.

"If you look at the opportunities at Manchester, there is a huge catchment area surrounding the airport from a leisure travel perspective but increasingly so from a business perspective as well. We have a very close working relationship with the airport and together we are evaluating a number of route opportunities over and above the ones announced this week."

Actually, as the chart below demonstrates, easyJet is – right now – the third largest airline at Manchester as measured by seat capacity, 0.9ppts behind Ryanair, and 4.2ppts behind Flybe, which has become Manchester’s leading scheduled British airline. In terms of aircraft movements, easyJet is also third, just behind BA, which has 11 daily flights to and from London Heathrow (soon to be its only MAN route when the Gatwick service is withdrawn) but considerably behind Flybe, which has more than three times as many movements in both the peak and non-peak periods.

It is interesting that easyJet should have discovered, somewhat belatedly, that the immediate city-region served by the airport has substantial commercial/business significance (in keeping with the carrier’s continuing drift towards attracting business carriers, see Background Information). It is in fact the second most significant in the UK as measured by a raft of economic measures including the economists’ favourite, ‘gross value added.’

It should be familiar to easyJet’s CEO Carolyn McCall, who was previously, until 2010, chief executive of the Guardian Media Group, which has considerable assets in the city including the Guardian newspaper, originally the Manchester Guardian and which is still published out of there, jointly with London. But even so the scope of the existing and planned services remains rather small in the overall scheme of things.

For example, while there will be 29 routes at MAN from 1Q2013, easyJet is presently selling 27 routes for the same period from neighbouring Liverpool, which is dominated by easyJet and Ryanair (collectively accounting for 92% of seat capacity momentarily with only a token presence from two other airlines; Flybe and Wizz Air). It is unlikely, surely, that MAG’s strategy is not to see many, preferably all, of those (unduplicated) routes transferred to Manchester, which internationally has considerably greater kudos as a business centre. (There has been some tension between the two airports since 2010 when Vantage Group took a 65% stake in Peel Airport and marked that transaction with some bold statements about taking transatlantic market share from Manchester. The history of animosity between the two cities dates back to the Victorian era).

Furthermore, the percentage of annual passengers at Manchester Airport compared with the four main London region airports other than Heathrow that are served by easyJet (Gatwick, Stansted, Luton and Southend) is around 29% with just 16% for the percentage of easyJet routes at MAN compared to the aggregate at those same four London airports. Gatwick alone now has in excess of 100 easyJet routes while newcomer Southend has already racked up 13. By these measures easyJet still has some way to go before it realises the “huge opportunity” identified by Ms Gayward.

It is also interesting to speculate on who will be easyJet’s chief rival at MAN. It certainly won’t be BA, now restricted to the Heathrow route. There is a feeling that BA would say goodbye to that as well if there was a fast rail line directly from Manchester into Heathrow.

Ryanair is the traditional rival where the two airlines find themselves in direct competition. Ryanair is also itself shifting emphasis towards the business traveller and has increased the scope of its flights at Manchester to airports in or close to cities such as Paris, Brussels, Milan, Oslo, Warsaw and Barcelona.

More likely though is that Flybe will be the main rival despite its well documented problems momentarily. FlybeUK made an operating loss of GBP1 million on stable revenues in the six months ended 30-Sep-2012, the period during which British airlines are expected to make profits to offset winter losses. That does not bode well. There are similarities in the modus operandi of the two carriers, which both deploy appropriately sized aircraft for primary regional operations with the reasonably frequent flight schedule that business travellers demand; something akin to the old British Airways Regional operations in Manchester and Birmingham in the 1980s with their BAC 1-11s.

That is something Ryanair does not really do with its rigid fleet of larger 189-seat B737-800s that are more appropriate to a daily schedule at best and usually less frequent than that. And, of course, while Ryanair might be enhancing its profile at some primary airports like Manchester it is still prone to dump business passengers well out in the boondocks at the other end of the journey at obscure airports where it is paying next to nothing to operate.

British Airways, as mentioned previously, is simply not in the game at all any longer, either at Manchester or any other UK regional airport. Indeed, in the third week of Nov-2012 it went out of its way to hint quite forcibly that it would not be prepared to operate again from Birmingham Airport (where it once financed a terminal building) because “passengers do not want to fly from there”, prompting some local dignitaries to kick-start an anti-BA campaign. As Birmingham hosts around nine million passengers a year, that seems to be a strange statement to say the least. But while the current management is in place, both at BA and at IAG, that is the measure of it for British regional airports.

One reason why Flybe may not be the principal rival for the growing easyJet presence is that its worsening financial situation seems to have caused it to reappraise its domestic operations, which account for 75% of its passengers. The management wants that to fall to 25% within five years.

In tandem with that decision is Flybe’s tendency to look more to the Nordic region, where it already operates quite extensively for Finnair as Flybe Nordic and is now reportedly considering buying Norway’s Wideroe. So the combined effect is less UK domestic flights, more international ones plus gravitation towards Scandinavia.

There are no such financial issues for easyJet, which turned in an operating profit of GBP331 million for the 12 months ended 30-Sep-2012, an increase of 23%. Its net profit was GBP255 million (+13.3%), its best ever profit performance.

The financially secure easyJet, seemingly now distancing itself from longstanding disputes with its founder, appears to have set out its stall at Manchester and is there to stay. Which prompts the question, why could British Airways not have done the same?

Background information – easyJet’s continuing transformation as a business airline

easyjet will unveil new technology in 2013 which is designed to make it easier for travel management companies (TMCs) and corporate clients to book the airline’s flights. The airline is currently working with the three main Global Distribution System (GDS) providers – Amadeus, Sabre and Travelport – on technology innovations to make easyjet’s inventory easier to access.

easyjet’s share of the European business travel market has increased by around 0.5% to 6% in a tough flat or declining business travel market.

The roll out of allocated seating across easyJet’s services, which is scheduled to be completed by the end of Nov-2012, is designed to attract passengers who would not previously have considered using the airline. According to CEO Carolyn McCall, the airline’s main strategy is to make more revenue from these corporate travel sales rather than growing volume to gain market share. The sales team is ‘incentivised’ by the amount of TMCs they sign up and on the incremental margin they generate; not on market share or the number of seats sold. The objective is to locate a sweet spot where easyJet can make a higher margin per seat from business travellers while also saving money for the corporate client.

easyjet has already agreed deals with major TCMs such as American Express, FCm Travel Solutions and Portman Travel, as well as securing a contract to become a preferred travel supplier to British politicians through a deal with another TMC, the London-based Hillgate Travel. (Acquiring such political accounts is also a primary objective of Ryanair).

On 26-Nov-2012 easyJet announced plans to introduce allocated seating on all of its flights – typically over 1000 a day – from 27-Nov-2012. The airline trialled allocated seating in Apr-2012 with nearly two million passengers flying on 12,500 allocated seating flights. In response to the trial’s success, the airline took the decision to roll out allocated seating across the whole network. All passengers will be allocated a seat for free on easyJet’s flights but will have the choice of selecting a specific seat for a fee when they book flights, or adding them later to guarantee where they will be sitting. There are three bands of pricing, dependent on the seat selected: